AARP SmartBrief
Benefits
Which Retirement Plan Is Right for Your Small Business?
Given the variety of retirement plans, how do you choose the right plan for your company’s circumstances or decide when the time is right to establish a plan?
The choice of the appropriate plan will depend on an employer’s specific circumstances, including such factors as maturity of the firm, size, rate of growth, employee demographics, nature of ownership, and workforce stability.
An employer with a workforce of longer-service employees and a stable profit pattern may find a defined benefit plan most appropriate because it may deliver larger benefits than a defined contribution plan.
A new start-up company with the same number of employees may find a profit-sharing plan more appropriate because the company’s workforce consists of short term-service hires and the company’s profits may fluctuate. In this case, the profit-sharing plan may generate a greater accumulation of benefits and allows the employer not to make a contribution in a year when profits are down.
Another company may choose a 401(k) plan because the employees can fund their own benefits on a tax deferred basis even in years when the employer cannot make a contribution.
Who Can Help?
Many employers turn to professional counsel to help decide which plan is right for them, and to help with its design, installation, and administration including the following:
- A consultant or actuary can design, determine contribution amounts, and determine benefits in a defined benefit plan.
- A lawyer or plan specialist can draft the document, submit the plan to the Internal Revenue Service, and prepare the summary plan description. It is also possible to adopt a master or prototype plan sponsored by a bank, insurance company, or other financial organization.
- The choice of plan investments is left to the employer, including any combination of equity, fixed income, mutual funds, etc. However, if the plan involves significant funds, it may be useful to have investment counsel.
- Administration and accounting are needed for individual record keeping. This will include: determining eligibility, vesting and accrual of benefits, preparing annual reports to the IRS and plan participants, preparing allocations of contributions and earnings, and auditing a plan’s books and records.
- The employer needs to make a number of decisions concerning its design. An actuarial/benefits consultant, accountant, or an attorney can help clarify the options and provide assistance and guidance designing the most appropriate plan.
Administrative Costs
The ongoing administrative expense for any plan is dependent on a number of factors, including the type of plan and number of participants. Administrative expense alone should not be the decisive factor in the choice of a plan. For example: defined benefit pension plans, Employee Stock Ownership Plans, and 401(k)s are three of the most expensive types of plans to administer. However, they are also three of the most successful plans with respect to employee morale, motivation, and productivity.
Plans Can Change
It is important to remember that employer circumstances change over time. A retirement plan should not be expected to be static. For example, the most appropriate type of plan for today may change over time due to a change in the makeup of the employee group or the employer’s objectives for the plan. In these situations, a change in the plan may be appropriate. Unless the plan is the result of a collective bargaining agreement, its establishment is a voluntary action by the employer, and the employer can amend it as required.
Note: With so much to consider in selecting the right plan, consult professional advice to ensure that the plan selected is the right one for your business and employees.
Resources
DOL Small Business Retirement Savings Advisor
Easy Retirement Plans for Small Businesses
Related Links
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